For many retirees and people approaching retirement, their home makes up a significant portion of their wealth. Many people are under the assumption that the only way to access the equity in their home is to sell and downsize.

However, there is another option. A reverse mortgage is a tool homeowners aged 60 and older can utilise to convert a portion of their home equity into cash

What is a reverse mortgage?

A reverse mortgage enables homeowners to borrow against the equity in their home and receive payment, usually as a lump sum, a line of credit, or a re-occurring fixed payment. What makes a reverse mortgage different from other types of loans is that the borrowers do not have to make regular repayments to the loan amount. Being able to access funds and not be held to regular repayments makes a reverse mortgage an attractive option for retirees on fixed incomes. Instead, the loan does not need to be repaid until the death of the homeowners or in the case that the property is sold. It is however important to note that the loan will accrue interest from the time it is taken out until the full amount is repaid.

Reverse mortgages also offer borrowers flexibility in how they receive their payments. Some borrowers may prefer a lump sum payment to cover a large expense or a line of credit for emergencies, while others may need a regular monthly payment to supplement their income. Depending on the specific loan, borrowers have the ability to choose the option that best suits their financial needs.

One of the most appealing aspects of reverse mortgages is that homeowners retain ownership of their homes for as long as they continue to live in them. This means the homeowners will continue to benefit from any appreciation in the value of the home, and their family can inherit the property upon their passing.

Considerations before obtaining a reverse mortgage

While reverse mortgages offer several benefits, they are not without their considerations. It’s essential for homeowners to weigh the pros and cons carefully before deciding to proceed:

Interest Rates and Fees: Reverse mortgages often come with higher interest rates and fees compared to traditional mortgages. Borrowers should fully understand the costs involved and how they will impact the overall loan balance over time.

Aged Pension: A reverse mortgage may also impact your eligibility to receive the Age Pension. In this circumstance, you should consult with a financial planner to understand the impact it may have on your personal circumstances.

When considering a reverse mortgage, it is important to understand negative equity protection.  If you obtained a reverse mortgage after 18 September 2012, or are considering one, you will benefit from the no negative equity guarantee. This ensures that you will not owe the lender more than the value of your home if the home’s worth declines below your outstanding loan balance.

For more information about reverse mortgages, get in touch.